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PUBLIC POLICY: ACHILLES HEEL OF INDIAN ARBITRATION

Daniel Mathew

Introduction

Over the years there has been an increasing thrust on resolving disputes using alternate dispute resolution mechanisms in particular arbitration. This tremendous leap in its popularity could be attributed to its three defining characteristics – efficiency, cost effectiveness, and finality. For commercial transactions, arbitration became the ADR method of choice, with many nations passing supporting legislations.[i] These legislations dealt with numerous aspects of arbitration such as organizing arbitration, procedures, appointment of arbitrators, recognition and enforcement of arbitral award, to name a few.

The primary policy governing these legislations is to minimize interaction with the state justice dispensation machinery. This hands-off approach at no juncture implies a complete disconnect. In other words law enables a private adjudicatory body to perform a function essentially reserved for the state, and retreats to the background content with ensuring that certain minimum standards are maintained. These minimum standards are categorically enumerated in relevant legislations. Though included to discharge an important function at times their vague understanding creates more obstacles. The attempt of this note is to look at one such standard utilised prolifically in arbitration namely that of public policy.

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History of the Act

For long arbitration in India was governed by set of three different legislations namely The Arbitration Act 1940, The Foreign Award (Recognition and Enforcement) Act 1961 and Arbitration (Protocol and Convention) Act 1937.[ii] The Indian experience with the performance of its arbitration laws was rather poor,[iii] and it was often considered a serious obstacle in attracting foreign investment. In light of economic reforms undertaken in early 90s, reforming existing dispute resolution mechanisms was considered imperative. The Arbitration and Conciliation Act 1996 (1996 Act) was enacted to give effect to achieve that end. The Act went onto replace all the three previously existing Acts and had as one of its primary aim limited judicial intervention.

This singular idea of circumscribed intervention in all aspects of arbitration has been at the core of attempts to define expectations and structure understanding of the 1996 Act. The debate surrounding the interpretation of the concerned provision was fierce. [iv] Overwhelmingly it was argued that the new Act was a complete break from the past,[v] and was enacted to rectify a spate of shortcomings including that of excess judicial intervention. Therefore the Act clearly intended minimalist intervention.[vi] On the other hand, a minority advocating possibly a more rational view argued that the concerned provision merely noted that if at all an intervention was to be made it should be one that was specifically sanctioned by the legislation. In other words the new Act merely structured intervention and limited it to specific grounds, thereby effectively eliminating any roving intervention. The question therefore was not one of degree of intervention instead was of sanctioned intervention.[vii] The debate thus evolved into two intimately interlinked policy questions:

  1. What level of intervention, if at all any, the law permits in arbitration; and
  2. How does one reconcile power to intervene with other fundamental precepts of arbitration such as finality and certainty?

Public Policy as ground of scrutiny

The Arbitration and Conciliation Act 1996, deals with two kinds of arbitration, namely domestic arbitration and International Commercial Arbitration (happening both in and outside the territory of India).[viii] The outcomes of these arbitrations i.e. awards are subject to scrutiny based on differing standards. Validity of a domestic award could be assailed on grounds noted in §34, while enforcement of foreign awards could be resisted on grounds noted in §48. One standard however is common to both the provisions namely that of public policy. In other words, the law provides for a domestic award to be set aside if it fell afoul of the public policy of the land, while enforcement of a foreign award could be refused, if such enforcement led to violation of Indian public policy.

Public policy thus plays a crucial role in the supervisory regime to which arbitration is subjected to, more so because courts are required to conduct a suo moto enquiry as to whether a particular arbitral award falls foul of public policy. It has oft been referred to as an unruly horse[ix] and not without just cause. In virtually every case the dilemma remains, what precisely is public policy?

Initial beginnings

The understanding of public policy in arbitration jurisprudence had its beginning primarily in the contract law. In the seminal case of Central Inland Water Transport Corporation Limited and Anr. v. Brojo Nath Ganguly and Anr, it was conceptualized to be an idea closely intertwined with public interest and public good. Something that was in public good and was in public interest would form an integral part of public policy of India.[x]

For arbitration, the most important case pre 1996 was the case of Renusagar Power Co. v. Gen. Elec.[xi] Co.,. Public policy in this case was understood to include – a) fundamental policy of Indian law, b) interest of India; and c) justice or morality. At this juncture it is important to note – a) the Renusagar case was adjudicated under the Foreign Awards (Recognition and Enforcement) Act 1961[xii] implying that the understanding of public policy as enunciated was limited to foreign award and did not extend to domestic award. In other words a foreign award could be resisted on grounds that it was contrary to public policy of India as clarified in Renusagar; b) this understanding was a strict construction of the concept of public policy i.e. limited only to three specific grounds; and c) finally, considering the absolute break from the past with the enactment of 1996 Act, the precedential value of Renusagar was to be in doubt.[xiii] The problem however was that each of the three idea were extremely vague, and were so vast in their scope that it would not have been difficult to virtually bring any and everything within its ambit. Ironically this understanding came to be referred to as the narrow understanding of public policy.

For long this understanding held sway.[xiv] However a critical question that soon arose was whether similar understanding could be extended to domestic awards. Interpreters of arbitration law soon faced a dilemma of whether to treat domestic awards on par with foreign awards when it came to the question of scrutiny on grounds of public policy. Leading exponents on International arbitration jurisprudence would suggest that the two have to be dealt with separately.[xv] There seems to be an innate logic in this proposition.  In some instances domestic award would involve substantive laws of India and have lay people as arbitrators. In such cases it is important to ensure that Indian law is applied properly, and therefore need for a stricter control would be highly desirous.

In the context of a domestic award this question was answered in the case of ONGC v. Saw Pipes.[xvi] Validity of a domestic award can be challenged on the ground of public policy. Unlike a foreign award, a domestic award could be completely nullified if it violated public policy. ONGC bench went on to define public policy as – a) fundamental policy of Indian Law, b) interest of India; c) justice or morality; and d) patent illegality. The bench reasoned that citizens and residents of the country could not be permitted to transgress Indian law and therefore if a domestic award violated substantive law of the land or was contrary to provisions of the contract, such an award would be set aside as being contrary to public policy of the land. This understanding later came to be referred to as the broad understanding of public policy.

Critics of this decision have pointed that it was a fallacy on the part of ONGC bench to include within the realm of public policy mere error of law apparent on the face of the award.[xvii]

Ensuing complications: Interpretation Conundrum

This led to a strange scenario. The same expression, i.e. public policy, finding a place in two different provisions of the 1996 Act, was rendered different meanings. A fundamental rule of interpretation of statues is that an expression that is repeated in the statute carries the same meaning.[xviii] This is subject to an exception namely that of context in which the two words are used. Where the context differs the meaning differ. There is however nothing in the Act to suggest a different context, since the term public policy is not defined in the statute.[xix]

Further problems

Two ideas of public policy operating in two different fields i.e. Saw Pipes for domestic awards, and Renusagar for foreign awards respectively still seemed an acceptable proposition to litigants. The matter however got heavily complicated by some bizarre decisions. Topping the list was Satyam Computers v. Venture Global.[xx] Venture bench erroneously extended the reasoning of Bhatia International v. Bulk Trading[xxi] to conclude that even a foreign award could be set aside provided it was contrary to public policy of India.

This decision had widespread implications, specifically – a) a foreign award could be set aside on the ground that it violated the domestic public policy (Part I, Section 36), and b) its enforcement could be refused on the ground that it violated the international public policy (Part II, Section 48).[xxii] The choice of either challenging the award in its entirety or resisting its enforcement remains with the party seeking either of these options. It is evident though that if the entire award is challenged and set aside, there remains no question of seeking enforcement of such an award.[xxiii] Therefore since domestic public policy provides for a higher threshold, understanding of international public policy becomes a mere academic exercise, threatening to render the whole provision otiose.

The second of these decisions was that of Phulchand Exports Ltd v. OOO Patriot.[xxiv] This case took the question head on, and reasoned that there could not be two different meanings of the term public policy and concluded that the same meaning is carried in both the provisions. Therefore irrespective of whether one is dealing with domestic or foreign award, only one understanding of public policy applies.

Present situation

For a better understanding of the current scenario, it is necessary to understand a basic concept of arbitration. An important reason why arbitration came along as a preferred method was to neutralize an overriding advantage one of the parties might have in a dispute, if it was litigated in that party’s home jurisdiction. To avoid a possible bias, in international arbitration jurisprudence, the ability or autonomy of the parties to select a seat of arbitration is firmly entrenched. A seat is the legal jurisdiction to which the arbitration is bound. The seat would provide the curial law and the courts of the seat would supervise the arbitration in accordance with the laws of seat.[xxv]

Thus in arbitration, insofar as jurisdictions are concerned a clear distinction is drawn between seat and the rest. The seat is often referred to as primary jurisdiction, and the others as secondary jurisdiction. In arbitration jurisprudence, it is a settled law globally that the authority to set aside an arbitral award is limited only to courts of the seat of arbitration. Implying that only courts at the seat of arbitration can set aside an award.[xxvi] Once a challenge is made and is unsuccessful, or not made at all, conclusions of the arbitral tribunal as to the issues in dispute metamorphose into an arbitral award. It is this arbitral award that is then taken to various secondary jurisdictions for enforcement.

With the two above decisions, Indian jurisdiction now has assumed the authority to set aside a foreign award on an understanding of public policy that is yet not settled. In light of the above, it is crucial that certain relevant matters be given immediate thought, namely a) whether the manner in which judicial scrutiny of awards has been structured has obliterated the distinction between domestic awards and foreign awards; and b) if the two remain distinct is there a need to give thought to international public policy that would apply solely to foreign awards.[xxvii]

Conclusion

Public policy has seen no concrete definition till date. It is arguably difficult if not next to impossible to provide such a definition. At best one could conjure an vague understanding. However even the attempts made by judiciary as noted above clearly indicate a lack of clarity on what public policy ought to be in different contexts of domestic and foreign arbitral awards. Lack of clarity or guiding standards, as past experience suggests, opens the possibility of adhocism, leading to a situation where public policy is what the particular judge says it to be. Such indeterminism does not bode well for arbitration in India.

References

[i] Constitution of India, Art 51(d) – The state shall endeavour to encourage settlement of international disputes by arbitration.

[ii] The latter two legislations were passed to give effect to two international treaties to which India was party namely The New York Convention on the Recognition and Enforcement of Arbitral Awards 1961, and the Convention on the Execution of Foreign Arbitral Awards 1927

[iii] Guru Nanak Foundations v. Rattan Singh AIR 1981 SC 2075 at 2076, Desai J observed “However, the way in which the proceedings under the Act are conducted and without an exception challenged in Courts, has made lawyers laugh and legal philosophers weep. Experience shows and law reports bear ample testimony that the proceedings under the Act have become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary. Informal forum chosen by the parties for expeditious disposal of their disputes has by the decisions of the Courts been clothed with ‘legalese’ of unforeseeable complexity.

[iv] §5 – Extent of judicial intervention.- Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.

[v] A valid argument since it was modeled on lines of UNCITRAL Model Laws 1985, and not an extension of the previous sets of legislation. This was categorically noted in the Preamble of the Act.

[vi] For instance see Law Commission 176th report on Arbitration and Conciliation (Amendment) Bill 2001, page 7, paragraph 1.3.

[vii] For a lucid summary of both side of the debate see Amelia C Rendeiro, Indian Arbitration and Public Policy, https://www.texaslrev.com/wp-content/uploads/Rendeiro-89-TLR-699.pdf (last updated on 17.06.2013).

[viii] Post Bharat Aluminium Company v. Kaiser Aluminium Technical Services (2012) 9 SCC 552 decision, the applicability of Act is limited to arbitration happening within the territory of India. For arbitration happening under the Bhatia regime, the Act applies even to arbitration happening outside the territory of India unless expressely or impliedly excluded. Interestingly the 1996 Act, though heavily inspired from the UNCIRAL Model Laws 1986 dealing with international commercial arbitration, dealt with both domestic arbitration (Part I) and international commercial arbitration (Part II). This led to concerns of whether interpretation of provisions contained in various parts might lead to conflicting jurisprudence. Fali S Nariman, Ten Steps to salvage arbitration in India: The first LCIA India Arbitration Lecture, 27(2) Arbitration International 115, 121-122 (2011). This was not without due justification and was duly noted in the Law Commission 176th Report on Arbitration and Conciliation (Amendment) Bill 2001, page 8, paragraph 1.5

[ix] Mr. Justice Burrough, Richardson v. Mellish [1824] 2 Bing 229, 252 “It is a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from sound law.” Some 147 years later in Enderby Town Football Club Ltd v Football Association Ltd [1971] Ch 591, Lord Denning responded, with a good man in the saddle, the unruly horse can be kept in control, it can jump over obstacles”.

[x] AIR 1986 SC 1571. It would be instructive to reproduce the observations of the court in this matter “From the very nature of things, such expressions are incapable of precise definition. Public policy, however, is not the policy of a particular government. It connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts take the place of old, transactions which were once considered against public policy are now being upheld by the courts and similarly where there has been a well-recognized head of public policy, the courts have not shirked from extending it to new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy.” Similar ideas were expressed earlier in the case of Murlidhar Aggarwal v. State of Uttar Pradesh (1975) 1 S.C.R. 575.

[xi] AIR 1994 SC 860, paragraph 64

[xii] The Act was passed to give effect to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Award 1957, which reserves the right to each signatory country to refuse enforcement of award, would be contrary to public policy of that country.

[xiii] Factum of complete break and its relevance was noted in Sundaram finance Ltd v. M/s NEPC India Ltd AIR 1999 SC 565, (paragraph 9)The 1996 Act is very different from the Arbitration Act, 1940. The provisions of this Act have, therefore, to be interpreted and construed independently and in fact reference to 1940 Act may actually lead to misconstruction. In other words the provisions of 1996 Act have to be interpreted being uninfluenced by the principles underlying the 1940 Act. In order to get help in construing these provisions it is more relevant to refer to the UNCITRAL Model Law rather than the 1940 Act.

[xiv] Cited with approval in Smita Conductors Ltd v. Euro Alloys Ltd (2001) 7 SCC 328, paragraph 12.

[xv] See for instance observations of Redfern and Hunter noted in the Law commission 176th Report on the Arbitration and Conciliation (Amendment) Bill 2001, page 9. See also Report of Justice Saraf Committee on Arbitration, 2005.

[xvi] (2003) 5 SCC 705

[xvii] Nariman, supra note 8. Summet Kachwaha, The Arbitration Law of India: A Critical Analysis, 1 (2) Aisa International Arbitration Journal 105, 120 (June 19, 2013) https://www.kaplegal.com/upload/pdf/arbitration-law-india-critical-analysis.pdf. See also  McDermott International Inc v. Burn Standard Co (2006) 11 SCC 181 and Centrotrade Minerals and Metals Inc v. Hindustan Copper (2006) 2 ArbLR 547(SC).

[xviii] A.B.KAFALTIYA, INTERPRETATION OF STATUTES 79-80, (Reprint, 2010)

[xix] Even under the previous regime it was always understood that the idea of public policy had a common meaning and that Indian courts did not recognize anything called international public policy to be applicable only to foreign awards. Fali S Nariman, Foreign Arbitral Awards in India: Problems, Pitfalls and Progress, 6 (1) Journal of International Arbitration 25, 37 (1989).

[xx] AIR 2008 SC 1061. For a critical analysis of this judgment see generally Alok Jain, Yet another misad-Venture by Indian Courts in the Satyam Judgments, 26(2) Arbitration International 251-280, (2010).

[xxi] Bhatia International v Bulk Trading SA AIR 2002 SC 1432 extended the application of Part I to even foreign seated arbitration, leading to a scenario that a domestic award came to be understood as those awards which were not a foreign award as defined under Part II of the Act.

[xxii] The term domestic public policy and international public policy is used solely to refer to the differing understanding of public policy utilised to challenge an arbitral award and resist enforcement of arbitral award.

[xxiii] International Arbitration jurists have been grappling with this precise question for some time now. The bone contention is the power of the courts of the secondary jurisdiction. Under International commercial arbitration only the courts at the seat of primary jurisdiction can set aside an arbitral award. The question then remains, what is the status of an award that is set aside in a secondary jurisdiction. Incidentally, this debate itself is becoming secondary to another debate centered about the idea of delocalization of arbitration. The idea of delocalization does away with the importance of seat, effectively then doing away with secondary jurisdiction, and making all states wherever enforcement is sought as primary jurisdiction. Georgios C Petrochilos, Enforcing Awards Annulled in their State of Origin under the New York Convention, 48 Int’l & Comp LQ 856, 858 (1999).

[xxiv]  (2011) 10 SCC 300, paragraph 13.

[xxv] This supervision is limited to the procedural conduct of the arbitration, and not the merits of the arbitral award i.e. application of substantive laws selected by the parties.

[xxvi] NIGEL BLACKBAY & CONSTANTINE PARTASIDES, REDFERN AND HUNTER ON INTERNATIONAL ARBITRATION, 179 (5th ed. 2009).

[xxvii] Amendments to bring about such state of affairs have been noted in the recently circulated consultation paper by the Ministry of Law and Justice. https://lawmin.nic.in/la/consultationpaper.pdf (June 19, 2013),

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